MARKET WATCH: Crude prices continue decline

Sam Fletcher
Senior Writer

HOUSTON, June 22 -- Crude prices continued to slip June 21 following reports of high US inventories and with Nigeria's oil exports still not affected on the second day of a general strike that has paralyzed most of that country's economy.

Militant attacks on oil field facilities and workers had already reduced Nigeria's production in May to its lowest level since early 2003, Paris-based International Energy Agency recently reported. Production shut-ins peaked at nearly 1 million b/d and averaged 800,000 b/d last month. IEA estimated Nigerian production capacity at 2.49 million b/d, excluding 545,000 b/d considered as long-term shut-in (OGJ Online, June 12, 2007).

The general strike is primarily in protest of a government price hike on fuel for autos. Auto fuel is heavily subsidized in Nigeria, and the new administration wants to end that subsidy to free up cash. Workers also are protesting a hike in the value-added tax and the sale of two refineries that employ union workers. African news media report sabotage and mismanagement shut down Nigeria's four oil refineries months ago, leaving Africa's largest oil producer totally dependent on imported fuel.

"While disruption to oil loadings have not been apparent yet, further talks between the [Nigerian] government and the unions have not yielded results, and the government has decided to increase the police pressure. It is likely that the outlook will remain uncertain as we approach the weekend positioning, making a directional bias difficult," said Olivier Jakob, managing director of Petromatrix GMBH, Zug, Switzerland. "The main price development has been in the bottoming action of the RBOB [reformulated blend stock for oxygenate blending] premium to heating oil. However, with a fall of $5/bbl in the prompt [North Sea] Brent [crude] premium to West Texas Intermediate, the RBOB crack should not need to go to previous highs to attract as many imports," he said.

In the Houston offices of Raymond James & Associates Inc., analysts said, "At almost $70/bbl, oil is currently trading at the same level that it was following the spike caused by Hurricanes Katrina and Rita in 2005." Oil market fundamentals "remain remarkably strong" because of the dwindling excess production capacity of the Organization of Petroleum Exporting Countries, limited growth in non-OPEC supplies, "ever-present" geopolitical risk, and "the thirst of a relatively strong world economy," they said. "At this point, our main fear for oil is whether prices climb high-enough to stir 'demand destruction' concerns. We believe that a price north of $80/bbl is when such fears likely become justified," said Raymond James analysts.

Energy prices
The new front-month August contract for benchmark US light, sweet crudes dropped 21¢ to $68.65/bbl June 21 on the New York Mercantile Exchange. The September contract lost 31¢ to $69.20/bbl. On the US spot market, WTI at Cushing, Okla., was down 27¢ to $67.93/bbl. Heating oil for July delivery dipped by 0.92¢ to $2.02/gal on NYMEX. However, the July RBOB contract gained 1.86¢ to $2.25/gal.

The July natural gas contract declined by 4.3¢ to $7.35/MMbtu on NYMEX. On the US spot market, natural gas at Henry Hub, La., dropped 13.5¢ to $7.24/MMbtu. Analysts at Enerfax Daily said, "Moderate temperatures and a lack of hurricane activity have left ample amounts of natural gas in storage, driving futures prices down."

Meanwhile, they said, "The difference between current storage levels and the record-high inventories seen in 2006 is gradually shrinking. Inventories could enter the winter at a record high of 3.5 tcf or greater in the absence of a warmer-than-normal summer and hurricane-related supply disruptions."

Raymond James analysts noted that natural gas prices continued to tumble during the first four NYMEX sessions this week, down more than 8%, with a slight decline in premarket activity on June 22. If this session also closes lower, they said, "This will mark the first week in the past 2 months that all 5 days of the week have seen price declines."

In London, the August IPE contract for North Sea Brent crude declined by 20¢ to $70.22/bbl. Gas oil for July, however, escalated by $15.75 to $632.75/tonne.

The average price of OPEC's basket of 11 benchmark crudes dipped by 7¢ to $67.58/bbl on June 21.

Contact Sam Fletcher at [email protected].